Surprise Tax for the Self-Employed
A self-employed individual expects to pay taxes on profits from their business. Unfortunately, there is an additional tax that must be paid when all is said and done.
When you work for an employer, the employer withholds Social Security and Medicare taxes from your pay. The employer also pays their portion of Social Security and Medicare taxes. Depending on the size of the payroll, the employer may make these payments weekly or monthly. A self-employed individual does not have Social Security and Medicare taxes paid for them. Instead, they pay self-employment taxes on the profits of the business.
If you have your own business or are a subcontractor, the IRS considers you self-employed. This requires you to pay self-employment tax on the profits of your business. Typically, the IRS requires self-employed individuals to make quarterly estimated tax payments. If you fail to make these payments, you may be penalized at the end of the year.
Here is a helpful tip for the self-employed. Open a bank account just for your self-employment taxes. Every week or month, deposit enough money into the new account to cover the taxes for that time period. At the end of each quarter, when your self-employment taxes are due, you should have enough money saved up to make your payment. This will reduce the shock and frustration of trying to find the money to make the payment at the last minute. It will also help you avoid the nasty penalties from the IRS for not making your payments large enough or on time.
